There is, very clearly, the base effect which is at work, but if June CPI inflation is at a 30-month low at a time when the country continues to be in the grip of a very poor monsoon, some significant changes are taking place below the hood. Part of the reason, as the PMI data showed last week, is that with demand still far from back, output prices are very weak despite input prices rising, suggesting greater margin compression. Even fruits and vegetables, which should be the first to see high inflation in such periods of unseasonal rain, are witnessing inflation levels that are lower than those last year, a normal monsoon year.

There are various reasons for why inflation levels are likely to meet their glide path target of 8% in FY15. Most have to do with government policy. The decision to hike the minimum support price (MSP) by just 1.5%, for instance, underscores the government’s commitment to helping RBI fight inflation—in the past, high inflation years have been high MSP-growth ones. Deciding to sell 10 million tonnes of wheat through open market sales—and the amount can easily be doubled—also suggests the same thing, as does the delisting of fruits and veggies from the APMC in markets like Delhi; creating alternate mandis, of course, will take time. Equally important, with the UPA sticking to its fiscal deficit target for FY14, and the NDA deciding to stick to the Interim Budget’s FY15 target, another source of excess demand appears on hold. All of which suggest the central bank should cut policy rates tomorrow.

Events of the last few weeks suggest RBI may be inclined to do so for a variety of reasons, not least because the government seems on the same page when it comes to inflation-control—reining in MSPs, conducting open market sales of excess stock, keeping deficits under control and starting to clear stuck projects to get more productive capacity into the system. Equally important, with the economy continuing to remain weak—credit growth remains a muted sub-14%—demand triggers are needed. Which is why, over the past few weeks, RBI has tried to find different ways to ease liquidity and lower rates in a stealthy fashion—doing away with SLR/CRR and priority sector requirements for bonds raised by banks to fund infrastructure requirements is one such. Indeed, there are such few takers for liquidity, as SBI chairperson Arundhati Bhattacharya said recently, even AA-rated